We’d rather pay than change The politics of German non-adjustment in the Eurocrisis · We’d...

We’d rather pay than changeThe politics of German non-adjustment in the Eurocrisis

Nils Redeker

[email protected]

Stefanie Walter

[email protected]

University of Zurich

Abstract

Germany’s large current account surplus has been widely criticized, especially againstthe backdrop of the Eurozone crisis where the burden of adjustment was borne almostentirely by the crisis countries. We argue that Germany’s resistance to reduce its massivecurrent account surplus through an expansionary policy at home is rooted in distributivestruggles about the design of possible adjustment policies. In contrast, interstate financ-ing – such as granting bailouts to crisis countries – is much less controversial, turningit into a politically more expedient choice. Using evidence from original survey datafrom German economic interest groups, qualitative interviews with interest grouprepresentatives and policymakers in Germany, and data from public opinion surveys,we show that while there is general support for internal adjustment among Germaninterest groups, they disagree heavily about which specific policies should be imple-mented to achieve this goal. Together with a broad public and elite-based consensus toavoid a break-up of the Eurozone, this polarization turns financing into the politicallymost a ractive strategy. Rather than being rooted only in German ordoliberal ideasor Germany’s export-oriented structure, distributive conflicts contribute significantly toGermany’s resistance to reduce its large current-account surplus. This phenomenon canalso be observed in other surplus countries, as a brief analysis of interest group dynam-ics in Austria and the Netherlands shows.

Working Paper, May

Introduction

Germany’s massive current account surplus has been widely criticized in recent years. By

exporting more than it imports and saving more than it consumes and invests at home, the

country has accumulated the world’s largest current-account surplus, reaching almost %

of its GDP in (IMF, ). Even though there is considerable debate among economists

about the sources and possible remedies to the German current account surplus (e.g. Koll-

man et al., ) Germany faces considerable political pressure to rebalance its current ac-

count. International policymakers such as the French president, the director of the Interna-

tional Monetary Fund, the head of the ECB, and the US president have decried the German

current account surplus as ”unbearable” , a ”serious threat” , an ”unresolved issue” and

quite simply ”very bad.” Germany’s apparent unwillingness to adjust its domestic policies

in an effort reduce the surplus has been criticized especially against the backdrop of the Eu-

rozone crisis, in which the burden of adjustment has been borne almost entirely by the crisis

countries (Blyth, ; Wolf, ; Eichengreen, ; Frieden and Walter, ). During the

crisis, an expansion of German domestic demand could have helped crisis countries by cre-

ating additional export opportunities and countering the deflationary pressures within the

union as a whole. Although the size of these possible spill-overs remains contested (Capo-

rale and Girardi, ; Blanchard et al., ), Germany resisted political pressure to share

the adjustment costs in the Eurocrisis. More generally, despite the mounting international

pressure, the German government has done li le to implement policies designed to spur

domestic demand and investment (IMF, ).

This lack of adjustment is puzzling for a number of reasons. Although some argue that

Germany has no direct economic interest in reducing the surplus (e.g. Felbermayr et al.,

), the perceived lack of public and private investment in Germany has fueled heated

debates over the country’s ”investment gap” and ability to sustain future growth (Bach

et al., ; Südekum and Felbmayr, ). The surplus also leaves the country exposed

to negative economic and political developments abroad. For one, Germany’s high export-

dependence leaves the country vulnerable to economic crises abroad . Moreover, because a

Bloomberg ( ), ”France’s Macron Says German Trade Surplus Harmful to EU Economy”, . . .IMF ( ): ”Transcript of an Interview with IMF Managing Director Christine Lagarde with the Leading

European Newspapers Association”, . . .ECB ( ): ”Press Conference with Mario Draghi, President of the ECB, March .”CNBC( ): ”Trump reportedly calls Germans ‘very bad’”, . . .

current account surplus is always associated with net capital outflows, German investments

abroad are exposed to financial crises and value losses abroad (Baldi and Bremer, ;

IMF, ; Krebs and Scheffel, ). This is particularly true to the extent that global or

regional imbalances and the credit booms they fuel have often been a key driver of balance-

of-payments crises (Schularick and Taylor, ). In the Eurozone crisis, for example, the

countries with the biggest current account deficits were hardest hit by the crisis (Johnston

et al., ; Wihlborg et al., ; Baldwin and Giavazzi, ) and German banks were

heavily exposed to the risk of a default in deficit states (Bibow, ; Vermeiren, ). In

political terms, Germany’s surplus has fueled resentment on the part of deficit countries,

pressure by international institutions such as the International Monetary Fund (IMF) or the

European Commission, and, perhaps most threatening to Germany, protectionist impulses

among major trading partners such as the United States. This has created incentives to re-

duce the current account surplus that go beyond a purely economic rationale. Nonetheless,

Germany has not engaged in large-scale macroeconomic adjustment designed to reduce the

current account surplus.

This paper takes this puzzle as the starting point and examines why German policymak-

ers have resisted a substantial rebalancing of the current account, especially in the context

of the Eurozone crisis. We are of course not the first to examine this issue. Two existing

explanations dominate the literature and the public debate. The first emphasizes the im-

portance of ordoliberal economic ideas in German (and other surplus country) policy cir-

cles and the wider public (Ma hijs, a; Dullien and Guérot, ; Young, ; Bulmer,

; Wendler, ). These strongly-held beliefs about the axiomatic merits of prudent

fiscal policies and limited state involvement in the economy have shaped the way policy-

makers interpret policy problems such as the Eurozone crisis. They also provided German

decision-makers with a clear instruction sheet for how to deal with the crisis: deficit states

needed to reform their economies to bring down public debt and regain competitiveness,

any provision of financial help needed to be linked to tight conditions to avoid moral hazard

and most importantly, a reduction of imbalances by engaging in less fiscal discipline and/or

stimulating growth and inflation in surplus countries would only risk their hard-earned

standing on international markets and endanger price-stability (Ma hijs and McNamara,

; Ma hijs, a; Young, ; Schäfer, ). The moralizing framing of the Eurozone

crisis as a debt crisis (e.g. Wendler, ) and emphasis on maintaining a balanced budget is

seen as evidence for the dominant influence of ordoliberal ideas on German policymaking.

Many authors therefore suggest that adherence to these ideas rather than material interests

shaped surplus countries’ behavior in the Eurozone crisis, with some even suggesting that

the German crisis response went against Germany’s economic self-interest (Ma hijs, a;

Young, ). This contrasts with the second dominant explanation for Germany’s resis-

tance to rebalance, which is rooted in the literature on comparative capitalisms (Hall and

Soskice, ; Baccaro and Pontusson, ) and focuses on the structural importance of the

export sector for the German economy. This structural perspective holds that the need to

preserve shelter the competitiveness of German export sectors created a large coalition of

policymakers, employers and workers opposed to measures that would expand domestic

demand, lead to higher inflation, and a rise of the domestic wage level (Thompson, ;

Leupold, ; Mahnkopf, ; Schimmelfennig, a; Höpner and Lu er, a). At the

same time, the German growth model relies on a stable monetary union and benefits from

a situation in which the German real exchange rate is structurally weaker than it would be

if Germany returned to a national currency citepStreeck a, Hall , Leupold . Be-

cause Germany and other surplus countries wanted to preserve their growth model while

at the same time safeguarding the Eurozone, adjustment was consequently pushed on to

the crisis countries (Hall, ).

Both of these approaches provide valuable insights into the sources of the German sur-

plus, yet they also leave open some question marks. For one, both of these dominant expla-

nations paint a picture of Germany as being united in its resistance towards macroeconomic

adjustment, either because of the dominance of ordoliberal ideas or because safeguarding

the export-led growth model constitutes the national interest. Yet adjustment politics in

surplus countries generate significant domestic distributive conflicts (Frieden and Walter,

), analogous to the distributive struggles that characterize balance of payments adjust-

ment in deficit countries (Eichengreen, ; Simmons, ; Walter, ). It is not obvi-

ous, for example, why labor unions representing workers in the non-tradables sector should

support wage restraint against the backdrop of a record and widely criticized trade surplus.

And indeed, as we will show below, the policy preferences of different economic groups

in Germany differ considerably. By assuming a homogenous national interest or national

economic ideology, the existing approaches cannot account for these differences and their

influence on German policymaking. Second, the existing approaches concentrate predom-

inantly on fiscal and monetary policy as well as wage-se ing issues. Macroeconomic ad-

justment decisions are, however, multidimensional. The German decision not to adjust has

significant consequences abroad, which puts the stability of the Eurozone in question and

increases the financing needs of those countries running large current account deficits, espe-

cially those facing difficulties of meeting these demands by enough private capital inflows.

Understanding why Germany opted not to adjust internally, thus also requires understand-

ing how German decision-makers evaluated these alternatives relative to the option of im-

plementing domestic policies designed to reduce the current account surplus.

Our paper contributes to such an improved understanding of German policymaking by

focusing on studying the drivers of Germany’s policy responses to the Eurozone crisis. Our

paper starts from the insight that severe balance-of-payments imbalances were a key cause

of the Eurozone crisis (Jones, ; Lane, ; Obstfeld, ; Baldwin et al., ; Frieden

and Walter, ). For surplus countries, there are three ways of responding to such a cri-

sis: external adjustment, internal adjustment and the financing of imbalances (Frieden and

Walter, ; Pepinsky, ). We argue that economic interest groups in surplus countries

differ significantly in how much they are helped or hurt by each of the available policy

options, and therefore also vary in their evaluation of these options. Rather than reflect-

ing a uniform preference for financing, we argue that Germany’s resistance against internal

macroeconomic adjustment is rooted in the distributive struggles about the design of pos-

sible adjustment policies that result from these differences. Internal adjustment is likely to

be particularly contentious, because it can be implemented in many different ways, many

of which benefit some groups, but hurt others. As a result, even in situations in which there

is general support for strengthening domestic demand, there is likely to be disagreement

about how to achieve that goal, making internal adjustment politically difficult. Together

with a broad elite and popular consensus to avoid a break-up of the Eurozone, the political

difficulties of forging a consensus on how to reduce the current account surplus make in-

terstate financing a politically a ractive strategy. This is especially true when the resistance

to such a strategy is low, or when there is a consensus on the preferred financing strategy.

We examine this argument using original survey data from German economic inter-

est groups, first-hand qualitative interviews with German policy-makers and interest-group

representatives, as well as public opinion data. We show that crisis policy preferences in

Germany are much more diverse and that internal adjustment is viewed much more pos-

itively than both the ideas-based and the growth-model argument suggest. However, we

also show that different types of interest groups, such as employer associations, trade unions

and social policy groups, vary significantly in their support for and opposition to the specific

policies that could be implemented to internally rebalance the current account. Whereas a

large majority of interest groups supports internal adjustment via policies that are to their

advantage, support drops significantly when internal adjustment involves policies to which

they are opposed, whereas support for financing increases. Because interest groups also

view financing as a much less salient issue and because the public shared interest groups’

resistance to a break-up of the Eurozone, financing is the politically more expedient alterna-

tive. Our analysis also shows that these dynamics can be equally observed in other Eurozone

surplus countries, such as in Austria and the Netherlands.

By demonstrating that the German export surplus is less structural than existing ap-

proaches recognize, our paper suggests that a rebalancing of the German current account is

not impossible. Rather, it will be necessary to design a policy mix that appeals to a broader

coalition of interest groups. Our results also suggest that as the costs of the alternatives –

a breakup of the Eurozone, financing of deficit countries, or even retaliatory and protec-

tionist reactions by other countries – rise, support for internal adjustment is likely to grow.

More generally, our paper shows that distributive struggles underlie the political stickiness

of large current-account surpluses and thus adds to our understanding of the persistence of

balance- of-payment imbalances at the global level.

Distributional Conflicts and the Politics of Non-Adjustment

We argue that non-adjustment in the face of a large current account surplus is rooted in dis-

tributional conflicts about the specific design of internal adjustment and the a ractiveness of

the alternatives, external adjustment and financing. Although most economic actors could

benefit from some internal adjustment measures to expand the economy, most of these mea-

sures also inflict substantial costs on others. The resulting polarization in opinions about

how internal adjustment should be achieved, makes internal adjustment politically costly.

Because financing tends to be a less divisive policy, it presents itself as a politically more

viable option than internal adjustment.

. Strategies in Balance-of-Payment Crises

The Euro crisis is at it’s heart a balance-of-payment crisis. Though the question how these

imbalances accrued is still subject to some debate, a broad consensus has emerged, that the

economic problems of the Eurozone eventually manifested themselves in severe balance-

of-payment issues (Jones, ; Lane, ; Obstfeld, ; Baldwin et al., ; Frieden and

Walter, ). For surplus countries, there are three ways of responding to such a crisis: ex-

ternal adjustment, internal adjustment and the financing of imbalances (Frieden and Walter,

; Pepinsky, ). External adjustment is usually achieved through adapting the nomi-

nal exchange rate. An appreciation of the exchange rate increases the price of domestically

produced relative to foreign goods, stimulates imports and thus leads to a reduction of the

surplus (Frieden, ). Of course, if imbalances arise within a monetary union, a change

or relative exchange rates requires (at least a partial) break up of that union. For surplus

countries in the Eurozone, external adjustment would thus not only mean to accept that

some members leave the common currency but also the uncertainty and potential financial

turmoil caused by such steps. A second strategy to rebalance the current account is inter-

nal adjustment, in which relative price levels are adjusted through macroeconomic demand

management. In order to reduce surpluses, governments in this scenario spur domestic

demand and allow wages to rise which leads to more imports and a reduction of the ex-

port overhang. However, what is important about internal adjustment is that, at the policy

level, it can be achieved through various ways. Policymakers who want to increase domes-

tic demand could as much step up public investment in infrastructure and schools as they

could reduce corporate taxes and cut red tape for businesses to incentive private invest-

ment (Bernanke, ). Similarly, they could raise the minimum wage, increase pensions,

or expand unemployment benefits (Eichengreen, ). While all these measures should in

theory contribute to the macroeconomic goal of more imports and less exports, their distri-

butional implications of course differ widely.

Finally, surplus countries can resort to financing. In this scenario, they refrain from ad-

justing their own economic policies and instead render deficit countries with the means to

sustain their current account deficits (Copelovitch and Enderlein, ). Again, there are

multiple forms of financing. Surplus countries can choose to directly transfer resources to

deficit countries, either through once-off bailouts or, in the case of a monetary union, by im-

plementing more institutionalized transfers such as joined automatic stabilizers. Transfers

can also occur through the banking sector by se ing out a debt relief for deficit countries

or through monetary policies as higher inflation rates help deficit countries to deleverage

and at the same redistribute from savers (mainly in surplus countries) to debtors (mainly

in deficit countries). Of course, all these measures are costly. As often pointed, transfers,

credits and debt relieves either put surplus countries’ ’tax payers’ money at risk or use it

directly to ease crisis pressures. However, compared to internal adjustment policies, the

distributional consequences of financing are much less clear cut. At some point, some tax

payers will have to pick up the bill. But which taxpayers and at what in point in time re-

mains an open question when financing policies are implemented. As Frieden and Walter

( ) put it, ”balance-of-payment crises thus confront policymakers with a list of una rac-

tive options.” However, it is also important to note that while different forms of internal

adjustment produce clear cut winners and losers, the costs of financing are much more ab-

stract and dispersed and are likely to emerge at a distant point in time. As we show below,

this has important implications for the politics of adjustment in surplus countries.

. Trade-Offs, Vulnerability Profiles and Adjustment Politics

We assume that different economic actors form their preferences with regards to crisis man-

agement based on the trade-offs they make between the material costs and benefits of the

three adjustment strategies outlined above. Building on Walter’s ( ; ; ) work

on adjustment politics in deficit countries, we conceptualize these trade-offs as ”vulnerabil-

ity profiles” that can be used to deduce testable hypotheses about the interests of different

actors.

Figure illustrates ideal type vulnerability profiles with regard to internal and external

adjustment as well as corresponding preferences. Actors situated in quadrant are vulner-

able to expansionary domestic policies but would benefit from higher exchange rates or a

break-up of the Eurozone and should thus prefer external adjustment over any other form

of crisis management. The opposite is true for actors displaying vulnerabilities that fall into

quadrant . These groups would gain from a boom in domestic demand and lose from an

appreciation of their currency. They are thus expected to favour internal adjustment over a

break-up or financing. Quadrant depicts the situation for actors that are highly vulnerable

Vulnerabiltiy external adjustment

Vul

nera

bilti

yin

tern

alad

just

men

t

benefit lose

bene

fitlo

se (I) Eurozone Break-up (II ) Financing

(IV) Internal Adjustment(III) Low Salience

F ₁: Figure - Vulnerability profiles and adjustment preferences

to internal as well as external adjustment. These groups would be harmed both by domestic

inflation and by a change in the composition of the monetary union. We thus expect these

actors to be willing to provide deficit countries with some form of financing.

Assuming that actors base their preferences on trade-offs between the costs and ben-

efits of different strategies thus results in straight-forward predictions about what crisis

responses they favour. However, as outlined above, the costs and benefits of internal ad-

justment very much depend on the policies that it consists of. Figure illustrates what this

means for the preferences of economic actors. It shows the vulnerability profiles of two styl-

ized groups - one trade union and one employer association. First, let’s assume that both

groups would lose from the uncertainty and turmoil linked to a break-up of the Eurozone.

They are thus situated on the right-hand side of the profile. Whether they prefer internal

adjustment or financing is now policy specific. In Panel A, internal adjustment is achieved

through raising the minimum wage. Assuming that a significant number of members of the

trade union would benefit from this, we would expect the group to champion internal ad-

justment. On the other hand, the employer association would clearly lose from this form of

expanding domestic demand - especially if it represents firms that rely on low-paid workers.

This puts the group in quadrant II. Being vulnerable to both a break-up and the specific form

of internal adjustment on the table, it prefers the much more abstract costs of financing as a

crisis strategy. The picture changes in a scenario in which policymakers decide to achieve

more domestic demand by reducing corporate taxes in order to increase private investment


Vul

nera

bilti

yin

tern

alad

just

men

t

benefit lose

bene

fitlo

se Employer Association

Trade Union

↑Minimum Wage

₍ ₎ Adjustment through higher minimum wage


Vul

nera

bilti

yin

tern

alad

just

men

t

benefit lose

bene

fitlo

se Trade Union

Employer Association

↓ Corporate Taxes

₍ ₎ Adjustment through corporate tax cuts

F ₂: Figure - Stylized examples: group-profiles depend on policy design

(Panel B). Now, the trade union, wanting to avoid the redistributive effects of tax cuts for

businesses, champions financing, whereas the employer association turns into a proponent

of internal adjustment.

The fact that preferences towards internal adjustment are policy specific has important

political implications. To have a meaningful effect on the current-account macro, internal

adjustment requires concerted efforts over a broad spectrum of policy fields. As Figure

illustrates, the distributional conflicts surrounding internal adjustment means that policy-

makers that want to pursue this strategy, will find it difficult to build a coalition to back

it up. While every policy they propose will garner support from some groups, it will also

provoke fierce opposition from others. At the same time, we expect distributional conflicts

about different financing policies to be less pronounced. While there multiple ways of im-

plementing interstate transfers, its difficult to predict who exactly is going to have to pay

the costs of these policies, independent of their specific design. Assuming that a majority of

groups want to avoid a break-up, this makes financing, where costs are more abstract, more

dispersed and less well-known, the politically more viable alternative.

These arguments have a four main empirical implications. First, many economic actors

should find some forms of internal adjustment a ractive. As long as domestic expansion is

achieved through policies that benefit their material interests (i.e. if actors are situated in

quadrant III or IV), we expect interest groups to prefer internal adjustment over financing or

a break-up of the union. Second, however, we also expect economic actors to be polarized

about how to adjust internally. As vulnerabilities to internal adjustment are policy specific,

many groups should support some forms of it but also fiercely reject others. We propose

that this polarization makes it difficult to build a coherent coalition in favour of rebalancing

the current account. Third, while we expect internal adjustment to be subject to distribu-

tional conflicts, similar conflicts should be less pronounced when it comes to financing. The

long-term costs of interstate transfers are more opaque and less well known. For interest

groups they should therefore be of li le political salience. Against this background, finally,

we expect financing to be the an ”easy out” for groups that want to avoid both a break-

up and internal adjustment. The more vulnerable groups are to specific forms of internal

adjustment suggested to them, the more likely they should be to support financing.

Research Design and Data

To understand what drove the preferences of German economic actors in the Eurocrisis and

how these preferences translated into politics, we combine an analysis of original survey

data with in-depths qualitative interviews with German interest-group representatives and

policy-makers. Focusing our analysis on economic interest groups such as trade unions

and employer associations comes with several advantages. First, these groups are central

actors in economic policy making (Hall and Soskice, ; Thelen, ). Especially in coor-

dinated market economies such as Germany, economic interest groups are deeply involved

in political decisions concerning the functioning of the economy (e.g. Paster, ) and their

concerns have been identified as crucial framework conditions in Germany’s approach to

the Euro crisis (Hall, ; Armingeon and Baccaro, ). Second, besides being substan-

tially important in their own rights, economic interest groups also render crucial clues to

their members and the broader public. Economic crises are complex events. To navigate

these crises and to form their own preferences with regards to it, citizens therefore turn to

political intermediaries for information and interpretation (Mcdermo , ; Kim and Mar-

galit, ). Economic interest groups therefore not only represent important interests but

are also likely to shape a wide range of preferences with regards to the Eurocrisis.

To examine our predictions about the drivers of group-level preferences, we therefore

use original data from an online-survey amongst interest groups registered at the German

Bundestag. Selecting groups from the Bundestag register ensures that they have preferences

with regards to policies at the national level and fulfil a minimum requirement of organi-

zational and political capacities. The register lists a total number of interest groups.

We focus on ”sectional interest groups” (Giger and Klüver, ), i.e. groups that represent

the interest of a relatively well-defined subset of societal interests and we disregard groups

that do not engage in economic or social policy-issues such as environmental groups, civil

right, criminal, family-issue groups and the like. We also ignore small groups with less than

members. This leaves us with a total number of groups that were contacted via two

waves of emails and subsequent reminder phone calls. The surveys took place between

September and December . groups participated in the survey corresponding to a

response rate of about percent. This falls well into the typical range of response rates for

interest group surveys (Marche i, ). Of these groups, percent are employer associa-

tions, percent are professional associations, percent are trade unions and percent are

social policy groups. This picture fits population of groups representing business interests

in the lobby register as well as the more diversified organizational set-up of business groups

in Germany (Dür and Mateo, ).

To complement this analysis, we furthermore conducted in-depths interviews with

interest-group representatives and policy-makers in Germany. The main goal of our conver-

sations with interest-group representatives was to understand what motivated their prefer-

ences with regards to the management of the crisis and how they pursued these interests po-

litically. We selected groups based on two criteria: first, their size and the relevance of their

members for the overall economy. Second, we chose a set of groups that represented a wide

range of sectors including manufacturing and services, domestic- and export-oriented asso-

ciations and trade unions including members with different levels of income. Furthermore,

we conducted interviews with policy-makers that were directly involved in decisions con-

cerning the management of the crisis, including officials of the responsible departments in

the finance ministry and the ministry for economic affairs and the major parties’ rapporteurs

for the crisis in the German Bundestag. We conducted all interviews between November

and December , in Berlin. A complete list can be found in the appendix.

A key assumption interest group surveys rely on is that individuals answering the questionnaire reflectorganizational positions rather their personal views. To make sure that respondents are knowledgeable enoughto do so, we sent personal invitations either to the heads of specialized divisions such as economics, social policyor international affairs or to chief executives or board members. Furthermore, the phrasing of the questionsthroughout the survey constantly reminds respondents to answer with respect to their organizational positions.

. Dependent Variable: Policy Preferences and Adjustment Choices

Our main dependent variable of interest is how German economic interest groups viewed

the policy choices available in the Eurocrisis and which policies they prefer if pressed to

choose. We construct this variable in two steps. First, we ask respondents to rank different

policy options from within each strategy from their most to their least preferred option.

Table provides an overview of the different options respondents were asked to rank within

each strategy.

Internal Adjustment Policies Financing Policies External Adjustment Policies

Public infrastructure spending Provision of Emergency Credits Deficit countries leave the EMU

Higher minimum wage ECB bond purchases EMU divides into North and South Block

Public spending on welfare European Unemployment Insurance Germany leaves the EMU

Decreasing VAT Haircuts on public sector debts

Decreasing corporate taxes Haircuts on private sector debts

T ₁: Overview of policy options in different adjustment strategies in the survey

We then use these rankings to build adjustment packages that represent stylized forms of

internal adjustment, external adjustment and financing and ask respondents to choose their

preferred strategy amongst them. As discussed above, each strategy can be implemented in

very different ways. Since we are especially interested in how preferences change depend-

ing on the specific policy content of the different strategies, we ask respondents to select

their preferred adjustment strategy twice. For their first choice, each set of strategies con-

tains each group’s most preferred options from within each strategy. If respondents, for

example, state that of the different options for internal adjustment they liked public invest-

ment and a reduction of corporate taxes the best, they have to chose between these policies

and their most liked options of external adjustment and financing. In a second step, the task

is repeated but respondents now are confronted with adjustment strategies containing their

least-liked policy options from within each strategy. The same respondent as above, for

example, now has to choose between an increase of the minimum wage and more welfare

spending as her least-liked form of internal adjustment, verses her most disliked form of

financing an a Eurozone break-up. As a single form of internal adjustment or financing is

likely to be insufficient for stabilizing the union, these packages each contain two policies

F ₃: Figure - Example Question on preferred adjustment strategy. Policies marked with as-terisks are subject to previous ranking of policies within each strategy. A = internal adjustment; B =external adjustment; C = financing.

from within their respective strategies. To get at the trade-offs groups make between differ-

ent strategies, each package furthermore lists the implications that following one adjustment

strategy has with regards to the others (e.g. choosing financing as a strategy means not to

engage in stimulating policies at home while at the same time allowing all member states to

remain in the monetary union). Figure presents an example for the choice interest groups

are asked to make. We thus arrive at two sets of categorical dependent variables, one rep-

resenting the respondents decision with regards to the adjustment strategies containing his

most-liked policies, the other measuring preferences when each crisis management strategy

lists her least-liked options.

Figure shows the distribution of adjustment choices. When confronted with choices

between packages that contain their favoured policies from within each strategy (left-hand

panel), percent pick internal adjustment as their favoured option, percent go for financ-

ing and only percent chose their most-liked form of a Euro zone break-up. The picture

changes when respondents have to choose between strategies containing their least-liked

policies. The share of respondents choosing internal adjustment. goes down to percent.

percent of the groups now pick their least-liked form of financing and only percent go

for their least-liked scenario of a Euro zone break-up. Evidence that trade-offs are much

harder in cases in which respondents are forced to choose between their least-liked forms

of the different strategies can also be seen in the fact that percent of the groups refused

to take a stance by answering ”Don’t know”.

F ₄: Figure -Share of respondents choosing each adjustment strategy as their preferred crisisresponse; Panel A (left-hand side) displays choices between packages containing the respondent’smost-liked policies within each strategy; Panel B (right-hand side) shows choices between strategieswith least-liked policies

. Independent Variables: Measuring Policy-Specific Vulnerabilities

We suggest that these adjustment decisions are informed by the trade-offs groups make

between the individual material costs and benefits of different forms of internal and external

adjustment. Of course, these group-level vulnerabilities to specific policies are difficult to

measure. To this end, we let respondents rate the different policies within external and

internal adjustment (see Table ) on a scale from (strongly oppose) to (strongly welcome).

We the utilize the ratings of the policies displayed in each adjustment package as a proxy for

how vulnerable groups assume to be to the specific policies they have to choose between.

Figure displays boxplots of the average vulnerabilities to policies from within each

strategy in the sample. On average, groups feel most vulnerable to a break-up of the Eurzone

and least likely to policies that would reduce the current account surplus. However, as we

will show below, these averages mask significant variation when it comes to specific policy

options.

An obvious critique of our approach is that these subjective ratings are not necessarily

based on material considerations. For example, an employer association could oppose an

F ₅: Figure - Boxplots of average vulnerabilities to each adjustment strategy

increase of the minimum wage, not because it would hurt its members but because of a gen-

eral ideological opposition against government intervention in the free market. We address

this critique in two ways. First, we include variables that capture the general ideological dis-

position of groups (see below). Second, we also collect data on how ”objectively” exposed

groups are to different policies by categorizing each group according to the Statistical Clas-

sification of Economic Activities in the European Community (NACE) and matching them

to economic data from the German Statistical Office. Based on this, we show that it’s not

ideology but mainly material considerations that inform policy ratings. The details of this

procedure are presented ins section .

. Control Variables

In addition, we include a number of control variables. To check for the effect of general eco-

nomic orthodoxy suggested by arguments about ordoliberalism, w include a survey item

that captures groups preferred level of state-intervention in the economy, ranging from

(large and encompassing interventions) to (no interventions at all). Furthermore, we in-

clude an item measuring general a itudes towards European integration ranging from

(European integration has gone too far) to (has not gone far enough). To account for the

variety of group types included in the sample, we include organization-type fixed effects

that capture if a group is an employer association, a professional association, a trade-union

or a social-policy group. Other control variables on group demographics include a measure

of group size and organizational capacities (measured as the number of full-time staff em-

ployed by a group) as well as dummy variable that controls whether a group represents a

single sector ( ) or a multitude of members active in different economic areas ( ). Summary

statistics for all variables are in the appendix.

Empirical Findings

What drives the crisis preferences of economic actors and how do they translate into politics?

Below, we discuss our findings along the four main hypothesis set out in section three.

. Most groups support some form internal adjustment

Contrary to much existing literature, we expect that interest groups support internal adjust-

ment over other strategies as long as it comes in forms that benefit their material interests.

Figure supports this hypothesis. Considering only the most-liked options scenario, Panel

A depicts the policy-specific vulnerability profiles of the groups in our sample. A clear ma-

jority is situated in lower two quadrants. These groups should benefit from the specific

forms of domestic expansion we suggest to them and thus prefer internal adjustment over

other strategies. Panel B shows that these vulnerabilities translate into the expected dis-

tribution of adjustment preferences. When we ask groups to choose their preferred crisis

response amongst packages that list their favoured policies from within each strategy, a

clear majority of almost % support internal adjustment.

Interviews amongst major economic interest-groups support this finding. A surpris-

ingly large number groups perceives the current-account surplus to be macro-economically

problematic. This includes all major trade unions but also a wide range of employer as-

sociations amongst them even clearly export-oriented ones such as the association of the

metal industry. While others rejected the notion that Germany’s large current-account sur-

plus did play a role in the Eurocrisis, even these groups stated that the German economy in

recent years clearly underperformed in terms of private and public investment and voiced

Interview with Florian Mori , DGB, . . and Dierk Hirsche, verdi, . . , Berlin.Interview with Michael Stahl, Gesamtmetall, . . , Berlin.

F ₆: Figure - Vulnerability Profiles and Adjustment Choices in Most-Liked Scenario

support for specific policies that would serve to counter this trend. Instead of building

a unified front in favour of preserving export surpluses, most of the actors we interviewed

thus were in favour of some measures that would increase domestic demand and reduce

the surplus.

. Groups are divided on how to adjust internally

Our argument suggests that policy-specific vulnerabilities to internal adjustment lead groups

to diverge on the question how to achieve domestic expansion. Following their individual

material interests, groups should not only be in favour of some internal adjustment poli-

cies, they should also oppose others. This should make it difficult to build unified coalitions

support a rebalancing of the current account. Figure presents evidence in line with this

hypothesis. It displays density plots of the vulnerabilities to different forms of internal ad-

justment policies across group types. While on average, most groups think that they could

benefit from some form of internal adjustment, there are clear differences in their percep-

tion of different alternatives. While, for example, a large majority of the trade unions, social

policy groups and professional associations in the sample would benefit from a higher min-

imum wage or more spending on social welfare, most employer associations feel that this

Interview with Reinhold Rickes, DSGV, . . and Eckhard Ro er, VDA, . . .In addition, several employer associations noted concern about the international implications of the large

surpluses, including exposure to shocks on foreign markets but also possible political repercussions if Germanyfails to reduce the surplus.

F ₇: Figure - Density plots of policy-specific vulnerabilities to different forms of internal ad-justment across different group types.

would harm their interests. The picture looks exactly the opposite ways when it comes to

lower taxes for businesses.

This fits well with what we learned from our interviews. All the trade unions we talked

to stressed the need to increase the minimum wages, to expand tariff commitments and

to re-regulation of opt-out clauses and temporary employment contracts. At the same

time, they fiercely rejected all forms of tax breaks for companies or efforts to deregulate the

service sector in order to stimulate private investments - the last one being a concern that

they shared with representatives of the craft association. Many employer associations, on

the other hand, emphasized the expansive effects of corporate tax cuts , the cut-down of

red tape in service industries or the deregulation of credit provision. At the same time,

most industry groups had not only fought the introduction of the minimum wage in

but still stated that they would have to lobby against further a empts to re-regulate labour

contracts and tariff commitments. One point that all groups agreed on and which is also

evident in Figure was the need for more public investment, especially for road and digital

infrastructure. However, opinions again diverged on the question how to finance these in-

vestments. While trade unions and craft associations demanded financing through public

money and possibly new public debts, many employer associations insisted on the intro-

Interview with Florian Mori , DGB, . . and Dierk Hirsche, verdi, . . , Berlin.Interview with Michael Stahl, Gesamtmetall, . . , Berlin.Interview with Eckhard Ro er VDA, . . .Interview with Reinhold Rickes, DSGV, . .

duction of more private-public partnerships, which would also provide new investment

opportunities to large institutional investors.

. Financing ranks low on interest groups’ political agenda

We propose that Germany’s response to the Eurocrisis was shaped by distributional conflicts

between different economic actors. Compared to internal adjustment, we expect these con-

flicts should be less pronounced when it comes to different financing policies. While the pos-

sible tools for spurring domestic demand and investment are all well-known, with clearcut

distributive consequences and have been subject to long traditions of political struggles, the

distributive implications of financing measures are rather abstract obscure and likely to be

widely diffused. We expect that this leads groups to be more indifferent about and less po-

litically engaged. Figure presents evidence in line with this characterization. The left-hand

panel shows boxplots of the average share of policies groups state to be in indifferent about

in each category. While on average, groups have definitive positions (meaning to either

support or reject them) on about % of the internal adjustment policies included in the sur-

vey, the same only true for about % of financing measures. The contrast between the two

strategies is even starker when it comes to their political salience (right-hand panel). When

asked how important the policies discussed in each category were for their political work,

almost % of the groups stated that they are important or rather important in the case of

internal adjustment. Only % said the same for financing policies. The rest characterize

these policies as unimportant or rather unimportant for their political work.

Similarly, while most groups we interviewed supported financial rescue measures, the

specificities of the bailout regime or further steps to institutionalize transfers did rank very

low on their political agenda. Even within the BDI, as the largest umbrella organisation

of the German economy, there was no formal consultation about the question of financing

policies to produce an official position. As a representative of a large umbrella associations

for business groups put it: ”The potential costs of these measures were never really thought

of or discussed. [...] There are simply other topics that are of much greater importance

Interview with member of the Fra scher Kommission, . . and Dierk Hirsche, verdi, . . .E.g. Interview with Michael Stahl, Gesamtmetall, . . , Berlin.

F ₈: Figure - Salience of Financing Policies

to our members.” In line with this characterization, none of the policy-maker we talked

to could remember any consultations with interest groups about the nature of different fi-

nancing measures.

. Vulnerabilities to specific forms of internal adjustments drive support for

financing

Due to the low salience of financing policies, we expect interstate transfers to be an a ractive

alternative for groups that are vulnerable to some forms of internal adjustment and that, at

the same time, want to avoid a break-up of the Eurozone. Figure starts investigating this

argument. Panel A shows the vulnerability profiles of different interest groups with regards

to their least-liked forms of internal and external adjustment. As expected, a large major-

ity of groups in this scenario is vulnerable to both strategies. Accordingly, as illustrated in

Panel B, support for domestic expansion drops to about % when we pressure groups to

choose between strategies listing their least-liked alternatives. Support for financing, how-

ever, increases by more than % compared to the most-liked scenario.

To analyse what drives decisions in the least-liked scenario more systematically, Table

presents results of a logistic regression analysis of adjustment choices. The dependent

Financing question were more important to trade unions. However, here they were mainly discussed withreference to the effects of the a ached conditionality to workers in deficit countries and not so much with regardsto potential distributional effects in Germany.

Interview PM , BMWi, . . , BerlinInterview PM ,BMF, . . , Berlin.

T ₂: Logit Regression - Policy Rating And Likelihood of Chosing Adjustment Strategies

Adjustment Choice - Least-Liked PackagesInternal Adjustment Financing

( ) ( ) ( ) ( )Rating Least-Liked Internal Policy . ∗∗∗ . ∗∗∗ − . ∗∗∗ − . ∗∗

( . ) ( . ) ( . ) ( . )

Rating Other Internal Policies (Av.) − . − . ∗ . .( . ) ( . ) ( . ) ( . )

Rating Least Liked External − . − . . .( . ) ( . ) ( . ) ( . )

Rating Other External Scenarios (Av.) − . ∗∗ − . ∗ − . − .( . ) ( . ) ( . ) ( . )

Market Liberalism − . .( . ) ( . )

European Integration . . ∗∗

( . ) ( . )

Group Size . .( . ) ( . )

Org. Type Fixed Effects ✓ ✓ ✓ ✓McFadden R-Square . . . .Observations

Note: ∗p< . ; ∗∗p< . ; ∗∗∗p< .

F ₉: Figure - Vulnerability Profiles and Adjustment Choices in the Least-Liked Scenario

variables take the value when the respective adjustment strategy (internal adjustment or

financing) is selected and otherwise. Our argument suggests that a group’s support for

internal adjustment is determined by its policy-specific vulnerability to different alterna-

tives of internal adjustment. Model and support this hypothesis. As evident from the

insignificant effect of the variable measuring the average position on internal adjustment,

a group’s general vulnerability to internal adjustment has no impact on its likelihood to

support this strategy in its least-liked form. However, the higher groups rank the specific

internal adjustment policies suggested to them, the more likely they are to support domes-

tic expansion. On the other hand, groups that feel vulnerable to internal adjustment should

perceive financing as an a ractive alternative. Model and find support for this hypoth-

esis as well. Again, it is not a group’s general outlook on policies that could contribute to

more domestic demand and higher inputs but the expected effects of the specific policies

under consideration that drive decisions. The more vulnerable groups feel to the suggested

forms of internal adjustment (i.e. the lower they rank them) the more likely they are to go

for financing. All of these findings are robust to the inclusion of variables controlling for the

groups’ general ideological position towards market liberalism and European integration.

To facilitate the interpretation of these results, Figure plots the predicted probabili-

ties of choosing internal adjustment and financing across different levels of vulnerabilities

towards the suggested form of domestic expansion. Groups that very much like the internal

adjustment policies that we suggest to them in the ”unpleasant options” scenario have a pre-

F ₁₀: Figure - Predicted probability of choosing internal adjustment vs. financing

dicted probability of about % to select domestic expansion. Their predicted probability

of going for financing, on the other hand, is less than %. Results are turned upside down

for groups that feel very vulnerable to the internal adjustment policies under consideration.

Now, the predicted probability of selecting internal adjustment lies only at about % while

more the likelihood of supporting financing rises to more than %. The probability for a

group to prefer financing over other crisis responses is thus larger the more vulnerable it is

to the specific form of internal adjustment under consideration.

To avoid unpopular forms of internal adjustment, groups seem to be ready to engage in

costly interstate financing. But why not simply let the monetary union fail? Our argument

suggests that financing should be a ractive for groups that are not only vulnerable to spe-

cific forms of internal adjustment but which also want to avoid a break-up of the Eurozone.

To investigate this argument, we rerun the logistic regression in model , this time includ-

ing an interaction term between the perceived vulnerability towards internal and external

adjustment. Results presented in Figure support our predictions. The effect of being vul-

nerable to the internal adjustment policy under consideration on the likelihood of choosing

financing is only positive and significant when groups at the same time very much dislike

the proposed break-up scenario. It gets smaller and insignificant with waning opposition

F ₁₁: Figure - Probability of choosing finance: Interaction of vulnerability towards externaland internal adjustment

towards external adjustment. However, note that more than % of our groups strongly

oppose their least-liked form of external adjustment and there is not a single group that

would actively welcome it. Strong opposition against a break-up of the union together with

policy-specific vulnerabilities towards specific forms of internal adjustment thus motivate

groups to support financing as their preferred crisis response.

Summing up, we find evidence for our main hypotheses. A majority of groups prefers

internal adjustment over other possible crisis responses as long as domestic expansion is

achieved through policies that serve their interests. The costs and benefits of different inter-

nal adjustment policies, however, differ across groups, resulting in distributional conflicts

about the specific form of internal adjustment. Together with the low salience of financing

policies, this makes interstate transfers a ractive. The more groups oppose specific forms

of internal adjustment, the more likely they are to support even their least-liked forms of

financing. This is especially true as a large majority feels vulnerable to external adjustment.

Alternative Explanations

How well does the evidence presented so far hold up against existing explanations of the

politics of non-adjustment in Germany? We find that group level preferences are more di-

verse than both structuralist and constructivist explanations of Germany’s lack of adjust-

ment in the Eurocrisis would predict. At the same time, adjustment preferences seem to be

driven by the trade-offs actor make between their subjective vulnerabilities to internal and

external adjustment. However, structuralist authors might point out our subjective vulnera-

bilities measures may not necessarily capture individual material considerations but differ-

ences in the concerns for German export-led growth model. Similarly, more ideas-centred

scholars might note that differences in evaluations of different policies could be driven by

differences in the ordoliberal creeds of different groups.

To address both of these concerns, we analyse how well objective data on the material ex-

posure of economic groups towards different forms of adjustment predicts their subjective

vulnerabilities. To that end, we first use the Statistical Classification of Economic Activi-

ties in the European Community (NACE) to code groups according to the main economic

activities in which their members engage. We then collect data on how exposed the so

categorized groups are to external adjustment and to what degree they could win or lose

from internal adjustment. First, to measure vulnerability to a break-up of the Eurozone we

use data on each group’s share of total output that is exported to other Eurozone members

(export dependence) from the input-output tables provided by the German statistical office

(Destatis, ). Second, to assess how much a group could benefit from domestic expan-

sion we use the income elasticity of demand for the main goods it provides. This elasticity

measures to what degeree an increase in aggregate income translates into more demand for

a specific good or service. The higher the demand elasticity for a group, the more it should

thus be able gain from higher domestic demand. We make use of several empirical studies

(European Union, ; European Union, ) as well as the COICOP categorization of the

UN Statistics Division to construct an ordinal scale of demand elasticity that ranges from

for very inelastic goods (such as food and tobacco) to for very elastic goods (e.g. financial

services and personal care activities). The main costs of internal adjustment are likely to

stem from higher unit labour costs and an associated decrease of the competitiveness for

domestic firms. We measure vulnerability to internal adjustment as the wage sensitivity of

different groups. This variable is based on the share of personnel costs in a sector’s total

At the two-digit-level, this categorization scheme allows me to differentiate between distinct fields ofeconomic activity, of which are represented in the German sample. For groups which represent actors frommore than one sector, we calculate independent variables by taking the unweigthed averages of all the sectorspresent amongst their members.

costs. The higher this share, the more sensitive a group should be to an increase of domestic

wages. The variable is again based on the German input-output table (Destatis, ). As

wage-costs are only relevant for employers, we interact this variable with a dummy indicat-

ing whether a group represents firms’ interests or not. Again, we include control variables

accounting for the general ideological leaning of the group.

Figure plots the results of a regression of these objective vulnerability measures on

the policy ratings we used as subjective measures of vulnerabilities. For each strategy, it

includes an average across all policies as well as two illustrative examples of other poli-

cies. Even though we use rather blunt macroeconomic measures, results are generally in

line with our expectations. As predicted by our argument, measures of material exposure

have a statistically significant effect on subjective vulnerabilities, even after controlling for

ideological factors. Groups that produce goods with higher income elasticities of demand

rate internal adjustment policies more positively. This is true for the average across all inter-

nal adjustment policies but the effects are especially strong for higher minimum wages and

a reduction of the VAT - both of which would increase the domestic income very directly.

Groups that are more wage sensitive and for which an increase of the domestic wage level

would thus translate into higher costs, on the other hand, rate internal adjustment policies

lower. However, the effect is only statistically significant for the most targeted policy to in-

crease of the wage level: an increase of the minimum wage. Our objective objective measure

work less well when it comes to predicting subjective vulnerabilities towards a break-up of

the Eurozone. Groups that are more export dependent rate different break-up scenarios

lower. However, the effect is not statistically significant. One likely reason is that all most

all groups in our sample feel highly vulnerable to a break-up of the monetary union, inde-

pendent of their direct exposure. This was also evident from our interviews. Even groups

that are clearly domestically oriented feared the general turmoil and insecurity of a break-

up. While, for example, the craft association has hardly any economic interests outside of

Germany, they worried that potential losses in the German financial sector would translate

into credit crunches for their members.

However, material exposure still played a role in the evaluation of policies at the Euro-

pean level as well. Model in Figure shows that export orientation does have a strong

and significant effect of groups’ ratings of financing policies. Groups that export more to

Europe rate financing policies on average higher and also evaluate the possibility of haircuts

on debts that are held by official or private lenders more positively. Again, the finding is

robust for the inclusion of ideological controls.

F₁₂ :

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Interviews with main interest groups substantiate these findings. First, whereas most

interest groups were very much aware of how different crisis responses would affect their

members, concerns about the German growth model ranked low on their agenda. Con-

trary, to more structuralist theories, for example, even trade unions in the export-oriented

sector stressed the need for an increase of the domestic wage level and emphasized that

wage-moderation in recent years was much more driven by a weakening of trade-unions

bargaining position than by strategic efforts to safeguard the sector’s competitiveness. Sec-

ond, while some of our interview partners would at points refer to ordoliberal arguments to

bu ress their interpretation of the Eurocrisis - especially when talking about the structural

problems of deficit states - they would use these arguments in rather flexible ways and did

not stick to ordoliberal frameworks when pressed about issues that were close to their ma-

terial interests. For example, almost none of the actors we talked to opposed the German

bailouts of or the provision of emergency credits to crisis countries in order to limit

contagion risks for the German banking sector even though these measures can hardly be

reconciled with the ordoliberal principle of economic self-responsibility. Similarly, interest

groups across the board welcomed the highly interventionist fiscal crisis package of .

As a representative of a ordoliberal business group put it: ”I think many business associa-

tions in principle agree with us about how the economy should be run. But when it comes

to political decisions, self-interest often trumps economic principles.”

So What? Implications of Interest-Group Findings

So far, we have presented our findings on the drivers of interest group preferences in the

Eurocrisis. In this last section we turn to presenting some ideas on how these preferences

ma ered for the politics of non-adjustment and how our findings tie in with the existing

literature on surplus countries in the Eurocrisis.

. Implications at the National Level

At the national level, distributional conflicts about the form of internal adjustment meant

that there was no concerted effort amongst economic interest group to push towards an en-

compassing program for expanding the domestic economy. As a representative of a large

umbrella organization put it ”of course the main employer associations - for microeconomic

reasons - have to come out against such measures [authors note: higher minimum wage, re-

regulating contracts]. But then in tripartite exchanges trade unions say ’But that’s exactly

what we want.’ [...] Nobody is thinking about these things in an overall economic context.

So that’s what makes it difficult.” As evident from our interviews and the survey data, most

groups claim that they did lobby in favor of some forms of internal adjustment - however,

they were very specific with regards to what forms and their efforts often directly contra-

dicted each other. The gridlock on how to adjust internally between interest-groups, was

mirrored at the level of policy-makers, especially during the grand coalition after . A

former member of parliament for the SPD stated: ”It was always our position that we should

do more spending on infrastructure etc. and do something about the wage level - that’s also

what we did with the introduction of the minimum wage in . But of course there are

limits to what you can do as long as the CDU governs.” Similarly, several policy-makers

with close ties to the CDU complained about the lack of the SPD’s willingness to take more

extensive measures to increase private investment after the crisis. Distributional conflicts

amongst economic interest groups thus produced important barriers against pursuing in-

ternal adjustment in Germany.

However, our results also indicate that economic groups were quite open to different

options of interstate transfers. So why was the German approach to financing still restric-

tive and tied to strong conditionality (Schneider and Slantchev, ; Bechtel et al., )?

While we can only speculate, we illustrate one possible answer with representative public

opinion data from - . Figure shows the German public shared the interest of eco-

nomic groups’ in keeping the EZ together. With the exception of Greece, a large majority

of voters was against any deficit country leaving the common currency, even at the hight

of the crisis in . Similarly, almost three quarters of the public thought that returning to

a national currency would be bad for Germany. While German voters thus did not show

much appetite for external adjustment, they were also deeply skeptical about interstate fi-

nancing. As indicated by Figure , more than percent were generally against financial

support for highly indebted countries and opposition was even stronger when asked about

concrete measures such as the expansion of the European rescue funds and the introduc-

tion of Eurobonds. Importantly, this rejection was universal across party lines. Though the

level opposition differed slightly, a majority of supporters of every party did respond neg-

atively to these financing question. And finally, while financing was of li le importance for

interest group, they did ma er a great deal to voters. When asked in , more than

Interview with PM , BMF, . . , Berlin. Interview with MP Heribert Hirte (CDU), . . , Berlin.

F ₁₃: The German public opposed external adjustment. Data from Politbarometer ( - )

F ₁₄: The German public was skeptical about financing. Data from Politbarometer ( - )

percent noted that the management of the Eurocrisis would ma er or even ma er a lot for

their electoral decisions. The issue was thus more example than some domestic issues such

as for example tax policies (Polibarometer, ).

While our results have shown that distributional conflicts amongst interest groups made

internal adjustment a difficult strategy to pursue, data on public opinion thus hints at the fact

that there also were li le electoral incentives for embracing a more encompassing and less

hesitant stance on interstate financing - a perspective was also confirmed in our own inter-

views with policymakers in Germany. Being jammed in-between interest groups blocking

internal adjustment and voters that opposed interstate financing, thus provides a plausible

explanation for the German hawkishness in the crisis .

. Implications at the International Level

At the international level, existing literature points out that surplus countries held very sim-

ilar positions during the crisis. While Germany was a key actor, its rejection of internal

adjustment and harsh stance on financing was shared by countries like Finland, Austria

or the Netherlands (Armingeon and Cranmer, ; Ma hijs, b). This homogeneity of

positions facilitated coalitions building amongst creditor states and added to their political

leverage (Schimmelfennig, b). Our argument may help to make sense of this homogene-

ity. If distributional conflicts around the specificities of internal adjustment were similar in

other surplus states, this would add to our understanding of why none of these countries

broke rank and called for a more balanced approach to adjustment.

Against this background Figure and present findings from interest-group surveys

in Austria and the Netherlands. Taken together, we collected another responses (NL:

(response rate %); AT: (response rate %)) using the same method as in Germany.

As expected, the pa ens are very similar across these countries. As in Germany, a large

majority of economic groups in Austria and the Netherlands would prefer their most-liked

form of internal adjustment over any other crisis response. However, as before support for

internal hinges on its specific policy content . A majority of groups actually prefers financing

when they are confronted with trade-offs between their least liked forms of adjustment.

Finally, shows that support for financing is driven by the groups’ vulnerability to internal

adjustment. The stronger a group opposes its least-liked form of internal adjustment, the

larger its probability to support financing.

We interpret this as evidence that our argument holds across different surplus countries.

Distributional conflicts about the how to expand the domestic economy made internal ad-

justment politically difficult to achieve in all creditor states. While the macroeconomic ef-

fects of spurring domestic demand in the Netherlands or Austria arguably would not have

had much of an effect for the Eurzone as a whole, this finding helps us to explain why none

of the other surplus countries challenged Germany’s of towards internal adjustment.

F ₁₅: Adjustment Choices in Austria and the Netherlands

F ₁₆: Predicted Probabilities of Choosing Internal Adjustment and Financing in Austria and theNetherlands

Conclusion

The debate about the German current-account surplus and its role for the emergence and

management of the Eurocrisis has long turned into one of the evergreens of EU politics. At

the same time, many outside observers are puzzled: why would a country facing a lack of

domestic demand and investment refuse to share the costs of adjustment in the Eurozone, if

doing so could not only foster its own economy but also hush a diverse choir of international

critics?

Our paper suggests that one reason for this lies in rather profane politics. Leverag-

ing original survey data and in-depths interviews with representatives of economic inter-

est groups, we show that German non-adjustment is partly rooted in distributive struggles

about the design of possible adjustment policies. Although we find general support for

strengthening domestic demand, different groups disagree about how to achieve this goal.

Together with a broad consensus to avoid a break-up of the Eurozone, the polarization on

the specificities of internal adjustment has made financing the politically most viable strat-

egy.

Our findings have a number of political and theoretical implications. First, our evidence

suggests that the German current-account surplus is less structural than existing explana-

tions assume. Some authors propose that the common currency is doomed to fail since Ger-

man export-orientation will always lead to current-account imbalances (Höpner and Lu er,

b). Others think that its impossible to unite countries with fundamentally different eco-

nomic beliefs and traditions into a monetary union (Brunnermeier et al., ). We agree that

both strands of literature pinpoint to important issues. However, our findings also suggest

that it would be possible to arrive at a more balanced current-account by designing pack-

ages of internal adjustment that garner broad-based political support. As we show above,

this is by no means an easy task and requires difficult compromises. But there is nothing

that dictates Germany to run surpluses at the current magnitude. For the Eurozone, this

is good news. Second, at least form the perspective of economic interest group, there is

political room to manoeuvre to engage in further financing measures such as haircuts on

outstanding debt or even more institutionalized forms of interstate transfers. Of course,

here voter preferences and the way they are perceived by German parties are going to be a

crucial and maybe limiting factor. But at least from important economic interest groups, we

would expect li le resistance against further fiscal integration.

Finally, our findings also have important implications for studying the political econ-

omy of balance-of-payment crises and global imbalances more generally. So far, research

on these issues has been characterized by a one-sided focus on the role of deficit states.

However, our findings from Germany suggest that distributional conflicts within surplus

countries play a crucial role in the build-up and maintenance of imbalances. Understanding

these conflicts and how they play into the stickiness of large current-account surpluses in

more detail, will be crucial for arriving at a be er understanding of the drivers of global

financial imbalances.

Appendix

. Additional Figures and Tables

s

T ₃: Summary Statistics - Subjective Vulnerabilities

Statistic N Mean St. Dev. Min MaxRating Int. Adj. Average . . . .Rating Higer Wages . .Rating More Welfare Spending . .Rating Public Investment . .Rating Lower CIT . .Rating Lower VAT . .Rating Financing Average . . . .Rating Emergency Credits . .Rating EU Unempl. . .Rating Gov. Debt Cuts . .Private Debt Cuts . .Rating ECB Asset Purchases . .Rating Break-Up Average . . . .Rating DCs leave . .Rating North/ South Divide . .Rating Germany leaves . .

T ₄: Summary Statistics - Objective Variables & Controls

Statistic N Mean St. Dev. Min MaxExport Intensity . . . .Share of Imported Inputs . . . .Income Elasticity of Demand . .Personnel Costs/ Total Costs . . . .Pro European A itudes . .Pro Market A itudes . .Organisation Staff Size/ . . . , .

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